Simplified Employee Pension (SEP) IRA
A SEP IRA, short for Simplified Employee Pension Individual Retirement Account, is a retirement plan designed for self-starters and entrepreneurs. Many of these business owners operate as sole proprietors, meaning they run their business on their own and report income and expenses on their personal tax return without forming a separate legal entity. This setup allows them to take full advantage of a SEP IRA, which provides a way to save significantly more than traditional options allow.
Let’s walk through how it works and whether it might be the right fit for your retirement goals.
SEP IRA, Simplified
At its core, a SEP IRA is a retirement savings account that allows business owners and self-employed individuals to make tax-deferred contributions, meaning you don’t pay taxes on the money you contribute until you take qualified withdrawals in retirement, typically after age 59½.
Here’s the key difference compared to a Traditional or Roth IRA: only the employer can contribute to a SEP IRA. If you’re self-employed, you’re both the boss and the employee, so you’re essentially contributing to your own account.
In 2026, you can contribute up to 25% of your net self-employment income, with a maximum of $72,000. While you can only contribute up to $7,500 in 2026 ($8,600 if 50 or older), SEP IRAs let you save far more.
Who's Eligible for a SEP IRA?
For Business Owners:
- Any business structure works: sole proprietorships, partnerships, LLCs, S-Corps, or C-Corps
- Self-employed individuals with earned income from their business
- Business owners with or without employees
For Employees (if you have them):
Your business must include any employee who:
- Is age 21 or older
- Has worked for your business in at least 3 of the last 5 years
- Earned at least $800 in compensation in 2026 ($750 in 2025)
Who's Not Eligible for a SEP IRA?
According to IRS rules:
- Employees under age 21
- Employees who haven’t worked at least 3 of the last 5 years
- Employees who earned less than $800 in compesation in 2026 ($750 in 2025)
- Individuals without net earnings from self-employment (for owner contributions)
Important: You can make it easier for employees to qualify for your SEP IRA plan, but not harder. If you contribute to your own SEP IRA, you must contribute the same percentage for all eligible employees if you have employees.
Calculating Your Maximum Contribution
Other types of income, such as investment income, rental income, or payments from side jobs that aren’t part of the SEP plan, do not count toward your contribution limit.
SEP IRA contribution limits are based on your compensation. For W-2 employees, this means the wages you earn from the employer offering the plan. For self-employed individuals, it is your net earnings from your business. Other types of income, such as investment income, rental income, or payments from side jobs that aren’t part of the SEP plan, do not count toward your contribution limit.
Because the IRS uses different rules to figure “compensation” for W-2 employees and self-employed individuals, we’ve separated the limits for each group below.
W-2 Employees
You can contribute up to $70,000 or 25% of your adjusted compensation in 2025, whichever is less. In 2026, the limit increases to 25% of net earnings, up to $72,000.
Self-Employed Individuals
For self-employed individuals, the IRS uses a special calculation to figure out your compensation for SEP IRA purposes. In this case, your compensation is your net earnings from self-employment, minus:
- One-half of your self-employment tax, and
- The amount you contribute to your own SEP IRA.
This adjusted figure is what your SEP IRA contribution limit is based on.
Helpful tip: Because your contribution also reduces your compensation, the math works out so that your maximum contribution is effectively about 20% of your net business income before adjustments. This is a commonly used estimate to simplify planning.
Key Deadlines
- Set-up deadline: You must establish your SEP IRA by your business’s tax filing deadline (including extensions) to make contributions for that year.
- Contribution deadline: Contributions are due by your business tax filing deadline, including extensions.
Note for most businesses: This deadline usually falls on April 15 of the following year, unless you've filed for an extension.
How SEP IRAs Support Business Owners
1. It’s Typically Simple To Set Up And Maintain
Setting up a SEP IRA involves less paperwork than other retirement plans, and setting one up is as simple as filling out an online form.
2. It Can Scale With Your Business
Had a good year? If so, you can decide to save more. If you’ve had a tough year, you can put in less. A SEP flexes with you. Unlike other plans that need regular contributions like a 401(k), a SEP IRA lets you adjust your contributions based on how much you earn.
3. It Can Help Reduce Your Current Tax Burden
Your contributions are tax-deductible, which can lower your taxable income for the year. Plus, the money grows tax-deferred until you take it out in retirement.
A SEP IRA in Action
Let’s say you’re a freelance graphic designer earning $100,000 a year. With a SEP IRA, you could contribute up to 25% of your net earnings from self-employment, which might allow you to put away tens of thousands of dollars while reducing your taxable income.
In comparison, a Traditional IRA limits annual contributions to $7,500 ($8,600 if you’re over 50), making SEP IRAs a much higher-contribution option.
Ideal For:
- Freelancers, gig workers, and self-employed individuals who don’t have access to a workplace retirement plan
- Small business owners looking for a straightforward way to contribute to their own retirement plan
- Self-employed individuals with variable income who want the option to contribute more in high-income years and less during slow periods.
Not Ideal For:
- People seeking tax-free withdrawals: SEP IRAs are funded with pre-tax dollars, so distributions are taxed as ordinary income. Those who want tax-free withdrawals might consider a Roth IRA instead.
- Those 50+ who want to make catch-up contributions: SEP IRAs don’t allow catch-up contributions.
- Businesses with multiple employees: SEP IRAs can be more complicated when covering multiple employees, making them less ideal for larger businesses.
Important Considerations Before Choosing a SEP IRA
Equal Treatment (If you Have Employees)
If you have eligible employees, you’re required to contribute the same percentage of their compensation as you do for yourself. That can add up quickly if your team grows.
No Roth Option:
All SEP IRA contributions are pre-tax only. If you want tax-free growth and withdrawals in retirement, you'll need a separate Roth IRA (subject to income limits).
No Catch-Up Contributions:
Unlike Traditional and Roth IRAs, there's no extra $1,000 contribution allowed for people 50 and older. This likely matters less because you can contribute exponentially more.
What Else To Know:
